Morgan Stanley Says Trump Border Tax Will Boost US Oil Industry

Evan Calio, Morgan Stanley’s Large Cap E&P Integrated Oil specialist, is overweight the energy market. In fact, with correlations faltering, regulations likely to fade, the potential for a large acquisition in the space forthcoming and most significant a trade tax policy benefit not priced into US crude stock, investment value abounds, he says.

Andy Hall Is Expecting An Explosive Move Higher For Oil

With a relative value correlation dispersion, oil stocks are starting to look good

Speaking with Adam Parker in a Morgan Stanley video, there is a correlation breakdown between the price of oil and stocks. Oil can move in price and the stocks do not necessarily have the same degree of reaction.

Oil prices, basis the West Texas Intermediate Contract, started 2017 trading near $54 but is now trading near $52.81. The Energy Select Sector SPDR fund (XLE), meanwhile, started 2017 trading near $76 and are now down to $72.87.

But it is not just the commodity that is outperforming stocks. This underperformance of stocks in the correlation pair is about to change. Energy credit, a more conservative investment often secured by assets, is also performing better than energy stocks, Parker pointed out.

Biggest benefit to WTI over Brent is going to be Trump’s border adjustment tax, delivering a $10 per barrel benefit that the market has not priced in

This apparent weak market will not last, Morgan Stanley predicted, touting an overweight in the sector.

“Commodity markets will heal in 2017,” Calio predicted, noting that the environment for US producers is particularly bright. Leading the list of potential positive contributors is a tax benefit – featuring Donald Trump’s border adjustment tax – as well as regulatory relief and anticipated /supply reduction.

Regulation is a topic that features a lot of layers similar to that of an “onion.” American energy is one of the most regulated US industries, but this is likely to change, potentially dramatically. Under the Trump administration regulations regarding oil production and distribution are likely to be dramatically reduced, reducing the management overhead burden for US-based firms.

It is not just regulation that will provide tailwinds. Morgan Stanley anticipates the “encroachment” alternative fuel sources have represented will change the supply picture and potentially impacting the price higher.

But there is one Trump administration policy that could be the most significant boon to the oil industry.

Trump’s controversial border tax adjustment is likely to add $10 per barrel to WTI crude oil relative to European Brent crude. The tax could make foreign oil much less competitive and has the “biggest potential boost to the sector.”.

Calio says the potential for a border tax to be implemented is much higher than the market anticipates and stocks are not pricing in this possibility. Morgan Stanley’s own economists give the border adjustment tax a 50% / 50% chance of passing, but Parker and Calio say their estimates of the potential for passage are much higher.

Andurand Commodities Fund Up 22 Percent In 2016 As Bullish Oil …

In such an environment, Calio notes correlation divergences among stocks. Some are more sensitive to the price of oil than others, while others have more idiosyncratic issues.

Anadarko Petroleum Corporation is one such stock. At the close of 2016, Anadarko traded at $69.73 and is today trading at $69.53, showing a slight positive correlation divergence with both the larger basket of energy sector stocks and WTI.  After enduring a major downtrend starting in the third quarter of 2014, the stock began rebounding in early 2016 near $32 and has trended higher since.

After talking up the stock in the summer, Morgan Stanley says it is not just a positive market trend that is driving the stock. There could be a potential industry transaction Calio didn’t not specifically detail that could boost the share prices higher.

As the economic world looks to fiscal stimulus to boost economic growth, those in the energy patch look to a border adjustment tax and elimination of subsidies for alternative fuels to make transform the market environment. “World needs growth from the US, particularly in 2018,” Calio said, pointing to increased demand potential.

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Source: valuewalk